Gold Spikes Higher on Unprecedented Fed Interest Rate Cut Low

By: Mark_OByrne

The surprise move by the Fed to lower the Fed funds rate by more than 75 basis points to a record low and an unprecedented band between 0.25% and 0% led to sharp falls in the dollar (low of 1.4188 to the euro) and a spike in the gold price to over $859.40/oz.

The Federal Reserve has embraced 'Helicopter Bernanke's' "inflate or die" massive reserve and money creation academic theories in an attempt to prevent deflation. Markets realise that this will lead to a lower dollar and higher gold prices in the medium and long term. Especially as Bernanke’s money printing looks set to be less of a helicopter style drop of money and more of a B52 bomber drop of humongous dollops of liquidity and cash into the US financial markets and economy.

The decrease to the lowest Fed funds rate ever in the US was greeted positively by stock markets but this will likely prove to be another instance of short term irrational exuberance.

With ZIRP (zero interest rate) policies, the US and global economy and monetary system is entering unchartered territory which is leading to continuing safe haven demand for gold. 2009 looks set to be another very uncertain and turbulent year and the largest financial crisis since the 1930’s continues to impact the global economy and financial markets.

The financial markets and global economy remain in flux. Inflation won the early rounds prior to deflation clearly winning the middle rounds of the titanic “flation” battle. But the concern is that inflation and stagflation will come out swinging in the following rounds. The taboo ‘hyperinflation’ word may soon become more familiar to our lips as stagflation and deflation have recently.

Bernanke’s academic knowledge of the Great Depression and Japan’s ‘Lost decade’ while useful is quite obsessive and myopic . He would do well to also study Weimar Germany as there are parallels with America’s massive predicament that are increasing by the day.

Gold Is One of the Few Asset Classes to Have Increased in Value in 2008
While gold is some 15% lower than its record high above $1,000 an ounce, hit last March, it is important to state that gold is one of the few asset classes up for the year. Gold is up 7% in USD terms, over 10.5% in EUR terms and over 39% in sterling terms (see Performance tables), clearly showing it’s safe haven credentials.

Gold did fall in US dollar terms as the US dollar rallied strongly in recent months. But, while gold fell from a record nominal high of just over $1,000/oz, it is important to remember that it is only down some 15% after surging nearly 60% in the previous 7 months. In the seven months from the start of the credit crunch and the collapse of Bear Stearns, gold had surged by nearly 60% - from $640 in August 2007 to over $1,000 in March 2008.

Thus after a 60% surge in just 7 months, gold had become overvalued and was due a correction. This is exactly what has happened and despite carnage in equity, commodity and property markets internationally gold remains higher in 2008 in all major currencies including the strongest currency in the world – the US dollar.

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

Mission Statement
Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at www.financialregulator.ie or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.